Stocks & Commodities V. 22:10 (82-88): Trading Sector Funds Using Statistics by John P. Twardy Ever thought of trading sector funds? Here’s a method that’ll give you an edge on the market. Sector fund analysis and trading always seem to require tools other than the standards used by the average stock trader. Because sector funds deal with a specific family of stocks, which are associated with a specific sector of the economy, at a specific time in the economic cycle, several layers of complexity are added to the analysis problem. Thus, while typical analysis packages provide moving averages, trendlines, and more, these methods aren’t enough when applied to sector fund analysis. SECTOR FUNDS DEMYSTIFIED What are sector funds? Sector funds are a subset of the mutual fund industry. Many mutual fund companies offer sector funds as part of their portfolios. There may be 30 or 40 sector funds available as investment vehicles from any one brokerage firm. Each of these funds invests in one particular sector of the economy, as diverse as real estate, biotechnology, insurance, wireless communications, gold, and so on. The individual sector funds hold stock in various companies that make up a portion of that sector. If you invest in any sector fund, your investment will be concentrated in one narrow industry sector. This select portion of the market may not follow the broader market trends, and at times will actually go against the trending market. Since investments in sectors represent such a narrow focus on the stock market, they tend to inherently represent a larger potential risk (and hence, reward) to the investor. |
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